Significant cut in cement price likely after budget

LAHORE - The cement manufacturers are seeking a reduction in excise duty by 55 per cent to Rs400/ton, implying a reduction in retail prices to the tune of Rs22 per bag.
However, given that the government is currently cash-strapped, analysts believe that a significant reduction is unlikely. On the other hand, recent media reports have quoted the Ministry of Finance stating that a 20-25% cut in excise duty is under consideration. If this materializes, retail prices could be reduced by PKR9.00-11.25/bag with no effect on retention prices.
Omair Chughtai in a report observed that it is expected cement prices to decline by about 15% YoY in FY10E given higher production capacity as well as a decline in input costs. These factors could combine to provide impetus to local cement off take in FY10.
APCMA has also proposed a subsidy of PKR200/ton for exports by sea. Analysts believe this is unlikely to happen given the governments limited fiscal space.
The NEC recently approved a PSDP outlay of PKR621bn for FY10E, representing federal and provincial shares of PKR421bn and PKR200bn, respectively. The federal component represents an increase of 5.3% over the PKR400bn originally slated (and 92.2% over the revised PKR219bn) for the current fiscal and leans heavily towards infrastructure spending with 49.6% or PKR209bn allocated for this purpose. Focus is likely to remain on dams and power projects given that Pakistan is currently contending with an acute water and energy shortage. Reportedly, work on the Diamer-Bhasha dam is scheduled to begin in FY10E with a government approved allocation of PKR23bn.
In addition PKR12 bn have been allocated to the Mangla dam to increase its water storage capacity by 2.88 mn acre feet for the next monsoon season, while PKR60 bn have been allocated to the water sector in order to build 32 small and medium sized dams.
Furthermore, PKR50bn have also been set aside for reconstruction and rehabilitation of IDPs in the northern areas where operations are currently underway to quell insurgency; this however, will not be a part of PSDP.
While the possibility exists that the government may initially allocate generously to PSDP and later revise it downward, we expect development spending in FY10E to remain healthy compared to the outgoing year, hence spurring local cement demand.
With several proposals on the cards which would affect the sector both directly and indirectly, analysts expect any impact of budget FY10E to be positive.
LUCK remains top pick in the sector and based on last days closing price, offers potential upside of 28.5% to fair value of PKR73. Moreover, it is trading at FY09E and FY10E PERs of 4.4x and 4.2x, respectively.
Analysts said that FY09E has been a mixed year for cement manufacturers with massive export growth of 49.5 per cent YoY in 11MFY09.
On the other hand, local demand shrinkage to the tune of 15.0 per cent over the same period and higher financial charges resulting from rising interest rates have been adverse factors.
Nevertheless, cement manufacturers on the whole have managed to post significant earnings growth in 9MFY09.